Major markets on both sides of the Atlantic declined by more than 4 percent, with investors dumping financial stocks in particular amid signs that the debt crisis on the periphery of Europe is rapidly becoming a banking crisis at its core.
The Dow Jones industrial average fell 520 points, or 4.6 percent, to 10,720, while the Standard & Poor’s 500 dropped 52 points, or 4.4 percent, to 1,121. The declines erased the major gains made Tuesday and dashed hopes that the markets were starting to rebound from their recent lows.
Early Thursday, U.S. and European stock futures rose 2 percent, slowing the decline of Asian stocks and signalling a recovery on Wall Street Thursday.
With fears of a fresh financial crisis on the rise, President Obama met with Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy F. Geithner at the White House to review the developments. A White House spokesman said that Obama is not overly concerned with day-to-day gyrations in the market and that he plans to meet with business executives to discuss the economy.
In France, President Nicolas Sarkozy raced back to Paris from his vacation on the Riviera for an emergency meeting of his economic advisers amid rumours in financial circles that the country could soon lose its top-notch credit rating if it is forced to bail out its banks.
On many global markets, trepidation about the health of Europe’s financial firms overtook concerns about the slow pace of the U.S. economic recovery and the stunning downgrade last week of the nation’s credit rating by Standard & Poor’s.
Shares of all the major European banks — including Germany’s Deutsche Bank, France’s BNP Paribas and Britain’s Barclays — fell sharply in trading. Speculators, meanwhile, increased their bets that the firms could collapse, although the odds, as measured by the cost of insurance against a default, remained low.
The steepest decline was at the French firm Societe Generale, one of the world’s largest banks, with $1.6 trillion in assets. The bank was forced to issue a statement denying “all market rumors” about its solvency and announced that it had solid earnings in July and August.
The problem for banks in France and Germany is that they have loaned hundreds of billons of euros to the governments of Spain, Greece, Ireland, Italy and Portugal. These governments are now struggling to avoid defaulting on their obligations.
Although investors have been expressing concern for months about the exposure of French and German banks to the troubled debt of other European countries, this has turned to alarm only in recent days, fuelled by a generalized anxiety about the world economy.
If major European banks were to suffer massive losses, that could ripple across the global financial system. Although U.S. banks have limited direct exposure to European government debt, they do extensive business with European financial firms.